Party of a contract who has complains of breach of contract must prove what is the actual loss suffered by it


Court :
HIGH COURT OF HIMACHAL PRADESH AT SHIMLA

Brief :
The undisputed facts are that the plaintiff, M/s York Export Ltd., and the defendants entered into an agreement whereby the defendants agreed to sell and the plaintiff agreed to purchase 164 bighas 7 biswas of land owned by the defendants comprised in Khata Khatauni No. 98/105, Khasra No. 245, Mauza Beerh Plassi, Pargana Plassi, Tehsil Nalagarh, District Solan, H.P. This agreement was entered into between the parties on 02.08.1995 and the rate of the land was fixed at ` 50,000/per bigha. Rupees two lac were paid as advance on 02.08.1995 itself and the agreement was reduced into writing. As per this agreement, the sale deed was to be got executed on or before 31.05.1996, but prior to that date, the plaintiff was required to pay a sum of ` 15,03,500/to the defendants. Admittedly, this amount was also paid on 21.08.1995. However, the sale deed could not be executed by the plaintiff by 31.05.1996 because permission under Section 118 of the H.P. Tenancy and Land Reforms Act was granted to the plaintiff for purchase of only 125 bighas of land. Thereafter, the parties renewed the agreement on 31.05.1996. The renewed agreement was also reduced into writing. As per this renewed agreement, the plaintiff was to pay Rupees eighteen lac more, which it paid on 4th June, 1996. As per this agreement, the sale deed was to be got executed by 31.12.1996, if by then permission to purchase the land was granted. This second renewed agreement also contained a clause that in the event of permission not being granted by the aforesaid date, the plaintiff was to pay another sum of Rupees seven lac and the sale deed could be executed up to 31.05.1997. It was further agreed that in case the permission was not granted even up to 31.05.1997, the plaintiff would pay the balance sale consideration in its entirety

Citation :
1. Shri Gian Chand 2. Shri Vinod Kumar, 3. Shri Bhupender Kumar, 4. Shri Vijay Kumar, 5. Shri Pradeep Kumar, all sons of Shri Mulkh Raj, M/s York Exports Ltd., a Company incorporated under the Companies Act having its registered office at F106 East of Kailash, New Delhi110065,

 

IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA

 

OSA No. 9 of 2005

Reserved on: 10.05.2012

Decided on: 14 .06.2012

 

1. Shri Gian Chand

2. Shri Vinod Kumar,

3. Shri Bhupender Kumar,

4. Shri Vijay Kumar,

5. Shri Pradeep Kumar,

all sons of Shri Mulkh Raj,

All resident of House No. 168, Mohalla Shekhan, Ropar (Roop Nagar) Punjab.

6. Mrs. Santosh Kumari, wife of Shri Kamal Kaushal, RCS Enclave780,

Sector – 49, Chandigarh.

…DefendantsAppellants.

 

Versus

 

M/s York Exports Ltd., a Company incorporated under the Companies Act

having its registered office at F106

East of Kailash, New Delhi110

065,

through its Manager, Shri S.N. Chopra, son of Shri Shyam Lal Chopra,

Opposite Sessions Court, Civil Lines, Ludhiana (Punjab).

…PlaintiffRespondent.

 

Appeal under Section 96 of the Code of Civil

Procedure read with High Court of Himachal

Pradesh (Appellate Side) Rules, 1997.

Coram

 

The Hon’ble Mr. Justice Deepak Gupta, J.

The Hon’ble Mr. Justice V.K. Ahuja, J.

 

Whether approved for reporting? Yes.

 

For the appellants: Mr. Bhupender Gupta, Senior Advocate, with Mr. J.L. Bhardwaj, Advocate.

For the respondents: Mr. K.D. Sood, Senior Advocate, with Mr. Mukul Sood, Advocate.

 

Deepak Gupta, J.

 

This appeal by the defendant is directed against the judgment and decree dated 3rd October, 2005, passed by a learned Single Judge of this Court.

 

2. The undisputed facts are that the plaintiff, M/s York Export Ltd., and the defendants entered into an agreement whereby the defendants agreed to sell and the plaintiff agreed to purchase 164

bighas 7 biswas of land owned by the defendants comprised in Khata Khatauni No. 98/105, Khasra No. 245, Mauza Beerh Plassi, Pargana Plassi, Tehsil Nalagarh, District Solan, H.P. This agreement was entered into between the parties on 02.08.1995 and the rate of the land was fixed at ` 50,000/per bigha. Rupees two lac were paid as advance on 02.08.1995 itself and the agreement was reduced into writing. As per this agreement, the sale deed was to be got executed on or before 31.05.1996, but prior to that date, the plaintiff was required to pay a sum of ` 15,03,500/to the defendants. Admittedly, this amount was also paid on 21.08.1995. However, the sale deed could not be executed by the plaintiff by 31.05.1996 because permission under Section 118 of the H.P. Tenancy and Land Reforms Act was granted to the plaintiff for purchase of only 125 bighas of land. Thereafter, the parties renewed the agreement on 31.05.1996. The renewed agreement was also reduced into writing. As per this renewed agreement, the plaintiff was to pay

Rupees eighteen lac more, which it paid on 4th June, 1996. As per this agreement, the sale deed was to be got executed by 31.12.1996, if by then permission to purchase the land was granted. This second renewed agreement also contained a clause that in the event of permission not being granted by the aforesaid date, the plaintiff was to pay another sum of Rupees seven lac and the sale deed could be executed up to 31.05.1997. It was further agreed that in case the permission was not granted even up to 31.05.1997, the plaintiff would pay the balance sale consideration in its entirety.

 

3. Admittedly, the plaintiff could not get permission to purchase the whole property even up to 31.12.1996. It was granted permission to purchase only 145 bighas of land in all.

 

4. According to the plaintiff, it approached the defendants offering to make payment of Rupees seven lac as per the terms of the renewed agreement. However, the defendants refused to accept the said drafts. Thereafter, the plaintiff wrote a letter on 08.01.1996 that since the permission to purchase the entire land had not been accorded, the time for execution of the sale deed stood automatically extended up to 31.05.1997. The plaintiff expressed their willingness to pay the sum of Rupees seven lac. The defendants responded to this letter by their letter dated 16.01.1997 and alleged that the plaintiff had failed to get the sale deed executed by 31.12.1996 and, therefore, both the agreements for sale stood revoked. According to the plaintiff, it took all steps to obtain permission for purchase of the entire suit land, measuring 164 bighas and 7 biswas, but the Government granted permission to the plaintiff to purchase only 145 bighas of land.

 

Therefore, according to the plaintiff, the agreement/contract stood frustrated and the plaintiff was entitled to refund of the entire amount paid by it, i.e. ` 35,03,500/along with interest at the rate of 18% per annum.

 

5. The defendants contested the claim and raised various submission, but the factual position, except with regard to the plaintiff offering a sum of Rupees seven lac, was not seriously contested. The stand of the defendants was that since it was the plaintiff who failed to perform its part of the contract, the defendants were entitled to retain the entire amount paid to them. The defendants also took up a plea that anticipating the payment of the balance amount of almost Rupees fifty lac, they had entered into the liquor business and taken liquor vends on auction but because this amount was not received, they suffered losses. According to the defendants, the contract did not stand frustrated because nothing prevented the plaintiff from executing the sale deed qua 145 bighas of land.

 

6. On the pleadings of the parties, the learned Single Judge framed the following issues:

 

“1. Whether the agreement for sale of land between the parties stands frustrated and has become

impossible for performance, as alleged, if so, its effect? O.P.P.

 

2. Whether the defendants have committed breach of the terms of the agreement, as alleged, if so, its effect? O.P.P.

 

3. Whether the plaintiff is entitled to recover any amount from the defendants, if so, to what extent? O.P.P.

 

4. Whether the plaintiff is entitled to interest on the amount found payable to it, if so, at what rate? O.P.P.

 

5. Whether the suit has been instituted by a duly authorized and competent person for and on behalf of the plaintiff? O.P.P.

 

6. Whether the plaintiff is estopped from filing the present suit on account of its acts, deeds, conduct and acquiescence, as alleged? O.P.D.

 

7. Whether the defendants are entitled to equitable set off of the amount, as claimed? O.P.D.

 

8. Whether the plaint lacks in material particulars, as alleged, if so, its effect? O.P.D.

 

9. Relief.”

 

7. The learned Single Judge decided issue No. 1 in favour the plaintiff. The learned Single Judge held that issue No. 2 had been wrongly framed. The learned Single Judge also held that the reasonable rate of interest would be 9% per annum up to the date of filing of the suit and 6% per annum thereafter. The learned Single Judge also held that issues No. 6 and 7 stood decided in view of the decision on issue No. 1 and held that issue No. 8 had become redundant. The learned

Single Judge decreed the suit in favour of the plaintiff for a sum of `39,20,000/along with further interest at the rate of 6% per annum from the date of institution of the suit till payment of the amount. Hence, this appeal by the defendants.

 

8. We have heard Mr. Bhupender Gupta, learned Senior Counsel for the defendants and Mr. K.D. Sood, learned Senior Counsel for the plaintiff. The following points arise for adjudication:

 

1. Whether the contract stood frustrated by the fact that the plaintiff did not get permission to purchase 164 bighas 7 biswas of land?

 

2. Whether the defendants were entitled to retain the amount paid to them by the plaintiff and if so, to what amount?

 

9. The plaintiff is not a Himachali and, therefore, in terms of Section 118 of the H.P. Tenancy and Land Reforms Act, it was required to obtain permission of the State Government to purchase agricultural land. According to the plaintiff, for running its plant, it required 165 bighas of land and, therefore, when permission was granted to it only to purchase 145 bighas, the agreement stood frustrated. The main argument raised by the plaintiff is that since it did not get permission to purchase 164 bighas of land, it became impossible to fulfill the agreement and, therefore, the agreement became frustrated.

 

10. Section 56 of the Contract Act, which deals with such situations, reads as follows:

 

56. Agreement to do impossible act. An agreement to do an act impossible in itself is void. Contract to do act afterwards becoming impossible or unlawful. A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

 

Compensation for loss through nonperformance of act known to be impossible or unlawful. Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promise sustains through the nonperformance of the promise.”

 

This case would be covered under the second part of Section 56, which provides that when the contract do an act becomes impossible after the execution of contract due to certain circumstances, which occurred thereafter, then the contract becomes void.

 

11. The learned Single Judge held that since it was impossible for the plaintiff to purchase 165 bighas of land without permission of the Government, the contract became a void contract. We are not at all in agreement with this finding of the learned Single Judge. The parties knew or were expected to know what is the law. In the second agreement, there is a specific provision that permission of the Government will have to be obtained. The Government first granted permission to the plaintiff for purchase of 125 bighas and thereafter, granted permission to purchase 145 bighas of land. There is virtually no material on record to show that after the second permission was granted, the plaintiff took any further steps to get permission for the remaining land. Be that as it may, even if such permission was not granted and specifically refused, the contract would not stand frustrated.

 

12. The parties at the time of the agreement could not have presumed that the permission must be granted. Supposing the Government refused to grant permission, then obviously, it would be a case of the contract not being able to be performed. However, when the Government grants permission, albeit for a lesser area of land, the plaintiff could have elected to purchase the lesser area, i.e. 145 bighas, for which the permission was granted.

 

13. It has been argued on behalf of the plaintiff that 145 bighas of land was not sufficient to set up the plant. There is virtually no evidence worth the name to support this plea of the plaintiff. The project reports of the plaintiff were considered by the State Government and the Department of Industries, which, after taking into consideration all factors, decided that permission should be granted only for purchase of 145 bighas of land. This itself clearly indicates that according to the Industries Department, 145 bighas of land was sufficient to set up the industry in question. 14. When the parties are aware that they may or may not get permission or they may not get permission for the purchase of the entire land, they either must incorporate some condition in the

agreement to meet such a situation and if there is no such condition, it does not mean that in every case the contract stands frustrated and cannot be performed. In the present case, the plaintiff could have easily approached the defendants and offered to pay the balance amount for the 145 bighas of land. This it admittedly did not do on the ground that it would set up the plant only in 164 bighas of land and nothing else.

 

15. Though, a number of judgments have been cited on the issue of frustration of contract, but it would be relevant to refer to a few. In Satyabrata Ghose versus Mugneeram Bangur and Co. and another, AIR (41) 1954 SC 44, the Supreme Court held as follows:

 

“xx xx xx

 

The essential idea upon which the doctrine of frustration is based is that of impossibility of  performance of the contract; in fact impossibiity and frustration are often used as interchangeable expressions. The changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform an impossibility.

 

xx xx xx

 

In the large majority of cases, however, the doctrine of frustration is applied not on the ground that the parties themselves agreed to an implied term which operated to release them from the performance of the contract. The relief is given by the Court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement. When such an event or change of circumstance occurs which is so fundamental as to be regarded by law as striking at the root of the contract as a whole, it is the Court which can pronounce the contract to be frustrated and at an end. The Court undoubtedly has to examine the contract and the circumstances under which it was made.

 

xx xx xx”

 

16. In Rameshwar Swarup (dead) by LRs versus Smt. Saroj Tyagi and others, AIR 1998 Supreme Court 3389, the Apex Court specifically dealt with the issue where the property was situated in a Cantonment area and the purchaser was aware of the power of the Cantonment authorities to resume the property. Permission to purchase the property was given by the CEO of the Cantonment with a condition that in case the Cantonment Board resume the property, the purchaser would not object to such resumption. The purchaser alleged that this condition in the permission imposed a condition which made the execution of the contract impossible. Therefore, it was pleased that the contract stood frustrated. The Apex Court held that the contract did not stand frustrated.

 

17. The Allahabad High Court, in Ganga Singh and others versus Santosh Kumar and others, AIR (50) 1963 Allahabad 201, dealing with the word “impossible” in Section 56 of the Contract Act, held as follows:

 

“The word 'impossible' in section 56 of the Contract Act has not been used in the sense of physical or literal impossibility. The sanctity of contract is the foundation of the law of contract and the doctrine of impossibility does not displace that principle, but merely enables the Court to enforce it equitably. It releases a party from its obligations to perform a contract where performance has become impossible as a result of events out of the control of that party. However, the plea of impossibility will not be entertained by the Court if in spite of supervening events, the object and purpose of the parties is not rendered useless and the contract can be performed substantially in accordance with the original intention of the parties though not literally in accordance with the language of the agreement. The Court will not apply the doctrine of impossibility to assist a party which does not want to fulfil its obligations under the contract and relies on literal impossibility to back out of it. The doctrine of impossibility, which is based on equity and common sense cannot be permitted to become a device for destroying the sanctity of contract.”

 

18. The Calcutta High Court in M/s. Mugneeraam Bangur and Co. versus Gurbachan Singh, AIR (46) 1959 Calcutta 576, held as follows:

 

“The doctrine of frustration is applied not on the ground that the parties themselves agreed to an implied term which operated to release them from the performance of the contract. The relief is given by the Court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement. When such an event or change of circumstance occurs which is so fundamental as to be regarded by law as striking at the root of the contract as a whole, it is the Court which can pronounce the contract to be frustrated and at an end. In applying the above principle the Court has to examine the nature and terms of the contract before it and the circumstances under which it was made or entered into and to determine whether or not the disturbing element which is alleged to have happened in the particular case has substantially prevented the performance of the contract as a whole. If the answer be in the affirmative, the contract will stand dissolved or discharged as “it is well settled that, if and when

there is frustration, the dissolution of the contract occurs automatically, and it does not depend, as does rescission of a contract, on the ground of repudiation or breach or on the choice or election of either party. It depends on the effect of what has actually happened on the possibility of performing the contract.”

 

19. In Merla Suramma versus Kakileti Sitaramaswamy and another, AIR (44) 1957 A. Pra. 71, the Andhra Pradesh High Court construed words “become impossible” in the following terms:

 

“The word “impossible” has not been used in the sense of physical or literal impossibility. The performance of a contract may not be physically impossible but it might be impracticable or useless having regard to the object and purpose the parties had in view. So, the section applies when the performance of a contract is beset with practical difficulties. The supervening event should take away the basis of the contract. It should be of such a character as to strike at the root of the contract. It is difficult to bring within the ambit of the rule a case where a contract has been given effect to, i.e., where one of the parties to it has performed his part of it and it remains for the other to fulfil his obligations under the contract. In such an event the party who had the advantage of the contract cannot be relieved from his liability on the covenants merely because some event had occurred which had resulted in some loss to him.”

 

20. Taking into consideration all these factors, we are of the considered view that when a party wants to prove that a contract has become impossible to be performed, it must prove that it had not envisaged that such a thing could have happened in future; that it was not responsible for the event which has occurred in future and lastly that even the substantial performance of the contract cannot be done. In the present case, all the three factors go against the plaintiff. The parties knew that permission had to be obtained under Section 118 of the H.P. Tenancy and Land Reforms Act. The plaintiff could nt have presumed that it would get permission for the entire land. Therefore, it was not a circumstance which could not be foreseen. After permission of 145 bighas of land was granted, virtually nothing was done by the plaintiff to get further permission. Lastly, there was nothing which prevented the plaintiff from purchasing 145 bighas of land at the agreed rate. Admittedly, the plaintiff made no attempt to do so. Hence, there is no frustration of the contract.

 

21. Having held so, the next question arises as to whether the defendants could have retained the entire amount which was advanced to them by the plaintiff or not. At best, the plaintiff was guilty of breach of contract inasmuch as the plaintiff did not agree to purchase 145 bighas of land. The consequences of breach of contract are dealt with in Chapter VI of the Contract Act, i.e. Sections 73, 74 and 75, which read as follows:

 

73. Compensation for loss or damage caused by breach of contract. When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

 

Compensation for failure to discharge obligation resembling those created by contract. When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.

 

Explanation. In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the nonperformance of the contract must be taken into account.

 

74. Compensation for breach of contract where penalty stipulated for. When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

 

Explanation. A stipulation for increased interest from the date of default may be a stipulation by way of penalty.

 

Exception. When any person enters into any bailbond, recognizance or other instrument of the same  nature, or under the provisions of any law, or under the orders of the Central Government or of any State Government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.

 

Explanation. A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.

 

75. Party rightfully rescinding contract, entitled to compensation. A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the nonfulfilment of the contract.”

 

22. Section 73 deals with cases where one of the parties has broken the contract by breaching one of the conditions of the contract. In such a situation, this party would be liable to compensate the other party who has suffered by such breach, but such party must show what is the loss suffered by it. The section itself provides that such compensation is not to be given for any remote and indirect loss or damage sustained by the reason of breach. Section 74 deals with cases where the agreement itself stipulates the penalty. In the present case, there is no penalty stipulated in the contract and, therefore, Section 74 will not apply. However, even under Section 74 when penalty is stipulated and a contract is broken, then also the party complaining of the breach is entitled to reasonable compensation not exceeding the amount mentioned by way of penalty. Here also the amount is a reasonable amount and cannot be the entire stipulated amount.

 

23. According to the defendants, they rightly rescinded the contract since the plaintiff had failed to fulfill his obligations under the agreement. According to Section 75, such a person, who rightfully rescinds a contract is entitled to compensation for damages which he has sustained through nonfulfillment of the contract.

 

24. Mr. Bhupender Gupta, learned Senior Counsel for the defendants, has cited a large number of authorities, namely, Sardarilal and others versus Shrimati Shakuntla Devi, AIR (48) 1961 Punjab 378; The Naihati Jute Mills Ltd. versus Khyaliram Jagannath, AIR (55) 1968 Supreme Court 522; Union of India versus Rampur Distillery & Chemical Co. Ltd., AIR 1973 Supreme Court 1098; Smt. Kamal Rani versus Smt. Chand Rani, AIR 1980 Delhi 188; State of Kerala and others versus M/s. United Shippers and Dredgers Ltd., AIR 1982 Kerala 281; Ram Rati versus Fakira, AIR 1988 Allahabad 75; Jai Ram Vaid versus Major General Anant Singh Pathania, 1993 (1) Current Civil Cases 548; V. Lakshmanan versus B.R. Mangalagiri and others, 1995 Supp (2) Supreme Court Cases 33; Indian Airlines Ltd. Versus Ram Awatar Garodia and another, 2001 (2) CCC 35 (Gau.).

 

25. There is no quarrel with the proposition laid down in these judgments, but we are of the view that far from helping the defendants, they, in fact, support the case of the plaintiff. In all these judgments, it is laid down that a party who has rightly rescinded the contract or complains of breach of contract must prove what is the actual loss suffered by it.

 

26. In the present case, since it was the defendants, who wanted to retain the amount advanced to them, they had to prove what were the losses actually caused to them. The allegation that they suffered loss in the liquor business has not been proved. It has not been proved what are the losses and it is further not proved how the loss is relatable to the present contract. Even assuming that losses were suffered in the liquor business, that had no connection with the agreement in hand and the loss, if any, would be too remote or indirect to be awarded to the defendants.

 

27. In fact, admittedly, the prices of land in that area have increased manifold. Far from suffering any losses due to the rescission of the contract, the defendants shall be gainers, because they have either sold or can sell the land at a much higher rate. Since no loss has to be caused to the defendants, they are not entitled to retain any of the amount advanced to them by the plaintiff.

 

28. As far as the interest factor is concerned, since the defendants utilized the amount advanced to them by the plaintiff, they in equity must pay interest on the same, if called upon to refund the

same. Therefore, we are of the considered view that the interest granted by the learned Single Judge is reasonable and calls for no interference.

 

29. In view of the above discussion, though we do not agree with the learned Single Judge on the issue of frustration of contract, we find no merit in the appeal and hence, the same is dismissed. No order as to costs.

 

(Deepak Gupta)

Judge

 

(V.K. Ahuja)

Judge

 

 

 

Diganta Paul
on 01 August 2012
Published in Property Law
Views : 2115


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